Dollar slides ahead of important US economic data

Important calendar events

• JPY: SPPI, BOJ Core CPI
• GBP: Public Sector Net Borrowing, CBI Industrial Order Expectations
• USD: S&P/CS Composite-20 HPI, CB Consumer Confidence, New Home Sales, Richmond Manufacturing Index

USD

The dollar resumed its decline on Monday, with the dollar index dropping below the 101.4 level. US Treasury yields also slipped, with the US 10-year bond yielding approximately 3.5%. 

The dollar has been weakening in the past few weeks against rivaling currencies. Stability has been gradually returning to the Banking sector, removing some of the incentives to invest in safe-haven currencies, such as the dollar.

The Federal Reserve raised interest rates by only 25 basis points at its meeting in March, bringing the benchmark interest rate to a target range of 4.75% to 5.00%. The Federal Reserve is holding its next policy meeting in May and market odds are in favor of a 25-basis point rate hike rather than a pause in rate hikes. Markets anticipate a pause in rate hikes after this last interest raise and a high probability of rate cuts starting in November, depending on economic conditions and inflationary pressures.

Recent US inflation data showed that price pressures are decelerating. US Consumer Price Index went down to 5.0% year-on-year in March from 6.0% in February. Monthly CPI rose by just 0.1% in March, indicating that inflation cooled significantly from February’s 0.4% print. Core CPI, which excludes food and energy, was in line with expectations, rising by 0.4% every month. PPI data last week fell below expectations, strengthening the notion that inflationary pressures are easing. PPI in March dropped by 0.5%, against expectations of remaining the same as in February. 

Final GDP data for the final quarter of 2022 were disappointing, showing that the US economy expanded by 2.6% against expectations of a 2.7% growth. 

There is no Fed commentary this week, as the Fed’s blackout period has started, ahead of the next policy meeting on May 3rd. The week ahead is packed with important economic data for the dollar. US Consumer Confidence, New Home Sales, and Richmond Manufacturing Index data are due on Tuesday. These are strong indicators of economic activity and may affect the dollar. 

Durable Goods Orders on Wednesday are strong indicators of economic activity. Advance GDP for the first quarter of the year is due on Thursday and this is the primary gauge of the economy's health. The core PCE Price Index on Friday is the Federal Reserve's primary inflation measure. As such, it has the potential to influence the Fed’s next rate decision and may cause volatility in dollar prices.

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EUR 

The Euro benefitted from the dollar’s weakness on Tuesday, with EUR/USD climbing above the 1.105 level. If the currency pair goes up, it may encounter resistance near 1.107. If the EUR/USD pair declines, it may find support at 1.083. 

Upbeat economic data bolstered the Euro on Monday. German business morale rose in April, according to the German IFO Business Climate survey. Business sentiment in Germany rose to 93.6 in April from 93.3 in March, indicating that the Eurozone’s leading economy is starting to recover.

Signs that the ECB will continue hiking interest rates provide support for the Euro. ECB Vice President Luis de Guindos stated last week that the ECB is unlikely to return to providing forward guidance on its next policy moves given the uncertainty in the outlook. De Guindos further warned that this approach will be likely maintained until the evolution of inflation and the effects of the ECB’s measures become clearer.

The ECB raised interest rates by 50 bp at its monetary policy meeting in March, bringing its main refinancing rate to 3.5%. The ECB stressed the importance of a data-driven approach to monetary policy moving forward. 

Headline inflation in the Eurozone eased to 6.9% year-on-year in March from 8.5 % in February, against expectations of a 7.1% print. Core CPI, which excludes food and energy, went up slightly to 5.7% on an annual basis in March from 5.6% in February, hitting a record high. 

Recent GDP painted a grim picture of the Eurozone economy. The GDP print for the final quarter of 2022 was zero, indicating that the EU economy is stagnating and recession looms.

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GBP 

The Sterling rose against the dollar on Monday, with the GBP/USD pair climbing to the 1.248 level. If the GBP/USD rate goes up, it may encounter resistance near 1.254, while support may be found near 1.235. 

CPI data last week showed that inflation in the UK remains high. Headline inflation remained above the 10% level for the 7th consecutive month, dropping to 10.1% year-on-year in March from 10.5% in February. Even though inflation showed signs of cooling, it exceeded expectations of a 9.8% print. Price pressures remain high in the UK, forcing the BOE to continue its policy of economic tightening at the risk of economic recession.  British Chancellor Jeremy Hunt stated that the CPI figures show that efforts to drive inflation down must continue.

The BOE raised interest rates by 25 bp at its meeting in March, bringing the official bank rate to 4.25%. BOE is expected to continue hiking rates by 25-bp at its next policy meeting in May. Market odds are in favor of more BOE rate hikes up ahead after last week’s hot inflation print. The BOE is not likely to pause rate hikes yet and many analysts predict no rate cuts at all within the year if inflation remains high.

The UK economy registered stagnation in March according to recent GDP data. Monthly GDP dropped to zero, falling below expectations of 0.1% expansion. In addition, the IMF has downgraded the UK’s growth forecast, predicting that the British economy will contract by 0.6% this year, which is also consistent with BOE forecasts.

The UK’s grim economic outlook limits policymakers’ ability to increase interest rates sufficiently to rein in inflation. The British economy is struggling, and policymakers will have to assess how much tightening it can withstand to bring inflation down.

Minor economic activity indicators are scheduled to be released on Tuesday for the UK and may affect the Sterling. These include Public Sector Net Borrowing and CBI Industrial Order Expectations.

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JPY

USD/JPY traded sideways on Monday, oscillating around the 134.3 level. If the USD/JPY pair declines, it may find support near 132. If the pair climbs, it may find resistance at 135.1. 

The BOJ interest rate decision this week is expected to attract considerable market attention. The BOJ Monetary policy meeting on the 28th will be the first meeting that newly-appointed Governor Kazuo Ueda will be called to preside over. 

Kazuo Ueda has replaced Haruhiko Kuroda, whose term in office ended on April 9th, becoming the BOJ's 32nd governor. Ueda will be faced with the challenge of normalizing Japan’s monetary policy after prolonged easing. Ueda has so far vowed to continue the BOJ’s ultra-easy policy, stating that he will carry out the monetary policy of his predecessor. 

Japanese policymakers maintained ultra-low interest rates at the BOJ policy meeting in March, keeping the central bank’s refinancing rate at -0.10%. The BOJ will likely keep a dovish stance at its meeting this week. The BOJ is expected to maintain its ultra-easy monetary policy, including its interest rate targets. However, recent reports indicate that Ueda may be gearing up for a change in policy later in the year. The BOJ is planning to conduct a review of the impact of its easing policies, with discussions starting at this week’s meeting. This might be the prelude to a shift in the BOJ’s monetary policy.

Final GDP data for Q4 of 2022 have shown that the Japanese economy has reached stagnation. Japan’s economic outlook is poor, raising recession concerns for the world’s third-biggest economy. The final GDP Price Index printed slightly higher than expected, with a 1.2% annual expansion, versus the 1.1% predicted.

National Core CPI remained unchanged at 3.1% year-on-year in March. Tokyo Core CPI for March was hotter than expected, at 3.2% on an annual basis, against expectations of a 3.1% print. Inflation in Japan remains steadily above the BOJ’s 2% target, putting pressure on businesses and households. Increased price pressures and wages, raise concerns of a wage-price spiral and may force the BOJ to pivot towards a more hawkish policy. 

BOJ Core CPI is scheduled to be released on Tuesday and may provide a more complete picture of inflationary pressures in Japan.

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Written by:
Myrsini Giannouli

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